Outsourcing for Greater Efficiency

Out-sourcing in business is common, but it has a different meaning for small business. The choice is not necessarily whether to bring a function in-house or find a contracted or part-time solution, but around business processes that can be farmed out.

“There are several issues involved with out-sourcing,” says Dick Reeves, CEO of small business incubator Business Technology Development Center, Inc. “First, it gives you access to capabilities that you don’t have and that may sometimes may not be available locally. For example, we have a software developer here who’s out-sourced most of his programming activities to the Ukraine. He needed specialized talent and out-sourcing was the best way to get it.”

Bottom Line Benefits

While you don’t generally have to go overseas to get the help you need, out-sourcing certain functions, like accounting, bookkeeping, HR, payroll, taxes, marketing and manufacturing, does more than help you on the talent side, it has clear bottom line benefits as well. If done right, out-sourcing can help you:

Cut overall costs and control your capital—Out-sourcing can help you flip a variable cost into a fixed one, thereby freeing up cash to use for other purposes.

Lower labor costs—Hiring and training staff can be expensive - and there’s no guarantee you’ll find the right person for the job - and temps might not be trained well enough to take on your tasks. The out-source gives you control over your HR resources, letting you pay for the expertise and time you need, without additional overhead.

Remain efficient—Without the overhead of doing everything in-house, you don’t have inflated costs to pass along to customers, which can be a key competitive advantage.

In deciding what to out-source, it may be best to first look at your core capabilities. While you created your business based on a product or service you know may well, you might also have some expertise in accounting or marketing. If that’s the case, you may want to keep those functions in-house.

“Typically, the first function we recommend out-sourcing is payroll,” Reeves notes. “It tends to take a lot of time administratively. In addition, payroll and HR are two areas in which you can make some key errors. Generally, out-sourced payroll providers take care of tax payments, and providers for both payroll and HR handle complex compliance issues, which can cause tremendous problems if not handled correctly.”

The Out-sourcing Agreement

One key to successful out-sourcing is the type of relationship and agreement you create with your resource. For example, you can always work on a spot basis for technology issues with a computer support company like Geek Squad or Geeks on Call, but it may make more sense to create a longer-term maintenance agreement with one of those companies or a local supplier.

“A longer-term agreement usually means you’re developing a relationship with a supplier who will take the trouble to get to know your business,” says Reeves. “In addition, you often get warrantees and other service options you may not get with a one-time arrangement. Think of it as the on-call availability of an expert who can look over your shoulder and guide you when you need it.”

Almost every function can be out-sourced, but, at some point, it’s more prudent to bring certain functions back in-house. “Bookkeeping or accounting are core to your business, but not necessarily to how you execute, so you usually can keep those functions out-sourced as long as you want,” Reeves observes. “But if you look at a function like marketing, which is so much a part of your identity and your sales, you can start with out-sourcing; however, as you grow, you’ll eventually want to control your message and hire someone full-time to do it.”

When you do out-source, Reeves says you need to make sure you stay on top of the relationships you create and consistently double-check the work that’s done for you. “Follow up, follow up, follow up,” he advises. “You need to make sure that your resources are executing appropriately based on your goals and objectives, and that they’re maintaining overall service levels. At one point, we worked with an HR service that listed us on its documentation as being in Alaska instead of Alabama. We didn’t catch the error until the IRS did and it made life miserable for us for a while. But it did teach us to regularly audit their work.”

When considering out-sourcing, Reeves recommends that you look at your mission, culture and current skill sets first, so that you’ve effectively “mapped” your needs. “With the current virtual nature of business and online collaboration tools available, the out-sourcing process has become much easier,” he says. “What successful out-sourcing comes down to is effectively integrating the processes into your organization so that your performance and productivity increase in an environment in which you feel completely supported regarding the functions you can’t do on your own.”

This article was taken from the Wells Fargo Small Business Roundup dated 7-11-06